Prior disclosure and adequate opportunity to respond defeat a natural justice challenge to fraud classification.

Axis Bank took over credit facilities of approximately ₹23.01 crore granted to Respondent No. 2 Company and subsequently classified its account as an NPA after defaults in repayment.

During the Corporate Insolvency Resolution Process (“CIRP”), a transaction audit was conducted.

The audit revealed, inter alia, that the Company had opened an undisclosed account with Nashik Merchant Co-operative Bank, routed over ₹6 crore through that account, transferred funds to related parties including Petitioner No. 1 and his partnership firm, and made other allegedly unjustified and interest-free advances.

The Petitioners were given access to the Company’s records and opportunities to respond to the draft Transaction Audit Report, but they allegedly failed to attend the scheduled office visits or provide the promised Tally data and detailed explanations.

Axis Bank thereafter issued a Show Cause Notice dated 6 September 2025, enclosing the final Transaction Audit Report and granting 21 days to respond.

Petitioner No. 1 sought an extension until 22 October 2025, citing unspecified family and medical issues; the request was refused.

On 16 October 2025, Axis Bank’s Fraud Identification Council classified Respondent No. 2’s account as fraud.

The Petitioners challenged the Show Cause Notice and classification order, principally alleging that the order was unreasoned and violated the principles of natural justice.

Whether the order dated 16 October 2025 classifying Respondent No. 2’s account as fraud was unreasoned and therefore legally unsustainable.

Whether the classification order was passed in violation of the principles of natural justice because the Petitioners were allegedly denied sufficient time and material to respond to the Show Cause Notice.

Whether the Petitioners could maintain the writ petition when the impugned order declared the Company’s account—not the Petitioners personally—as fraudulent, particularly after approval of a resolution plan for the Company.

The Court applied the RBI Master Directions on Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions dated 15 July 2024, including Clause 2.1.1.2, which contemplates issuance of a Show Cause Notice and 21 days’ time to respond, and Clause 6.1(iv), under which concealment or diversion of funds through an undisclosed bank account may constitute fraud.

It further relied on State Bank of India v. Rajesh Agarwal, (2023) 6 SCC 1, which holds that an order classifying an account or person as fraudulent must contain reasons demonstrating due application of mind, although the reasons need not be as elaborate as those in a judicial judgment.

The Court also applied the general principles of natural justice, particularly the requirement of a fair opportunity to know and answer the case against the affected party.

The Court held that the classification order was reasoned because it expressly relied on the adverse findings in the final Transaction Audit Report and its schedules identified diversion of funds through the undisclosed NMCB account, related-party transactions, unjustified transfers, and interest-free loans and advances to promoters and others.

Applying the natural justice standard, the Court found that the Petitioners had known the substance of the allegations from the draft audit report and the CoC meetings held in September and November 2024.

They had also been offered access to the Company’s office and records, but failed to attend the scheduled visits or provide the promised Tally data and explanations.

Since the Show Cause Notice enclosed the final audit report and granted the prescribed 21-day period, and the request for further time was unsupported by specific details, the refusal to extend time was held justified.

The Court also expressed serious doubt regarding maintainability because the impugned order declared the Company’s account fraudulent and did not declare the Petitioners personally fraudulent, but nevertheless considered the challenge on merits.

The Petitioners had adequate prior knowledge of the allegations, access to relevant opportunities and material, and the prescribed 21-day period to respond to the Show Cause Notice.

The writ petition was accordingly dismissed, with no order as to costs.